A quick guide for SBA lenders to distinguish between accounting-based book value and economic fair market value in business valuations.

Definitions

Book Value: The net value of fixed assets shown on the balance sheet (Assets – Accumulated Depreciation), based on accounting rules.

Fair Market Value (FMV): The estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date. (As defined by Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery & Technical Assets, Third Edition, by the American Society of Appraisers.)

Why They Differ

• Book value includes depreciation and historical cost accounting.
• FMV reflects current market conditions, economic use, and earning capacity.
• Book value may omit intangible assets (brand, goodwill).
• Book value may overstate or understate physical asset value.

When Book Value Is Used

• Asset-heavy companies where cash flow is secondary
• Liquidation or adjusted book value approaches
• Cross-check against income or market-based methods

Red Flags

• Valuation uses only book value for a profitable, cash-generating business
• Equipment shown at inflated value without appraisal support
• Appraiser references Net Asset Value without explaining adjustments to FMV